Chip Stocks Are in a 'Crisis of Confidence' — But Bernstein Sees Room to Run

The PHLX Semiconductor Index has fallen 30% from its June highs even after gaining 50% on the year as of Friday's close — and Bernstein analyst Stacy Rasgon says the sector is clearly "suffering a crisis of confidence."

In a Monday note, Rasgon laid out both the damage and the case against panic. The hardest number: the index traded at roughly 16 times forward earnings estimates at Friday's close, down from 28 times at its June peak, according to Dow Jones Market Data. That's "sharp multiple compression," he wrote — valuations shrinking even as earnings expectations keep climbing.

Why are investors dumping chip stocks?

The selloff hit makers of semiconductor equipment and central processing units hardest, Rasgon noted. These were the segment's stellar performers earlier in the year. Investors keep questioning whether AI spending can last.

The trigger was a slate of earnings from big cloud companies. The reports pointed to continued strong spending on AI infrastructure against dwindling cash flows. Investors now worry about delays in the buildout, Rasgon said, and about the rising debt levels companies are taking on to fund their AI ambitions.

"The stocks are clearly telling us that investors are getting worried about sustainability of demand, wondering about returns and doubting more and more about where the funding might be coming from to support the (very strong) forecasts that have been offered up by many companies in the space," Rasgon wrote.

What do cloud earnings actually show?

Rasgon reads the same earnings reports differently. Some big cloud companies flagged lighter spending in the near term, but he said all the cloud providers have either kept or raised their spending expectations for this year — "and all appear to expect significant acceleration as we move into next year." In his view, that supports the idea the AI trade has more room to run.

Even Intel, whose stock plunged 29% on Friday after its Thursday earnings report and wiped out $140 billion in market capitalization, flashed a positive signal for the AI trade, Rasgon said. Investors were disappointed by Intel's December-quarter outlook, which came in below expectations partly on ongoing weakness in the PC market.

But Intel's data-center and AI business delivered strong performance, Rasgon noted. The segment — which includes data-center CPUs and custom networking — is seeing high demand as agentic AI adoption takes off. And Intel's client-computing group isn't weak because of demand problems, he argued; rising memory prices are slowing shipments, and those price increases stem from insatiable AI-driven demand for memory chips.

Which names held up best?

The pattern of the selloff tells its own story, according to Rasgon:

• Analog-chip names, which mostly serve the automobile and industrial markets, outperformed the broader sector "as overall AI sentiment has soured."
• Nvidia and Broadcom shares, which traded at more of a discount, also fared better than peers — likely helped by those lower valuations, he added.

For now, Rasgon is focused on Nvidia and Broadcom, which he views as the main drivers of the chip trade. He's also upbeat on semiconductor-equipment makers, which he expects to post multiyear growth as the data-center buildout continues.

He's encouraged by Advanced Micro Devices as well — AMD competes mainly with Intel in the CPU market and with Nvidia in graphics processing units — though he acknowledged it faces the same PC-market challenges. AMD reports quarterly earnings Tuesday afternoon, giving investors the next data point on whether Rasgon's read on the sector holds.